-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UxwzfEq6U2lSHcDkq0k23ccqVgqyz50KkhtzSfpyjpbU5P1tBQoQUhw2vH94MaAQ 9tYcc9TnN1+9djinraYZBQ== 0000950152-00-000968.txt : 20000214 0000950152-00-000968.hdr.sgml : 20000214 ACCESSION NUMBER: 0000950152-00-000968 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARDINAL HEALTH INC CENTRAL INDEX KEY: 0000721371 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 310958666 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11373 FILM NUMBER: 536775 BUSINESS ADDRESS: STREET 1: 5555 GLENDON COURT CITY: DUBLIN STATE: OH ZIP: 43016 BUSINESS PHONE: 6147175000 MAIL ADDRESS: STREET 1: 5555 GLEDNON COURT CITY: DUBLIN STATE: OH ZIP: 43016 FORMER COMPANY: FORMER CONFORMED NAME: CARDINAL DISTRIBUTION INC DATE OF NAME CHANGE: 19920703 10-Q 1 CARDINAL HEALTH, INC. QUARTERLY REPORT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended December 31, 1999 Commission File Number 0-12591 CARDINAL HEALTH, INC. (Exact name of registrant as specified in its charter) OHIO 31-0958666 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 7000 CARDINAL PLACE, DUBLIN, OHIO 43017 (Address of principal executive offices and zip code) (614) 757-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of Registrant's Common Shares outstanding at the close of business on February 1, 2000 was as follows: Common Shares, without par value: 281,295,303 ----------- 2 CARDINAL HEALTH, INC. AND SUBSIDIARIES Index *
Page No. -------- Part I. Financial Information: --------------------- Item 1. Financial Statements: Condensed Consolidated Statements of Earnings for the Three and Six Months Ended December 31, 1999 and 1998 (unaudited)....................................... 3 Condensed Consolidated Balance Sheets at December 31, 1999 and June 30, 1999 (unaudited).......................................................... 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1999 and 1998 (unaudited)............................................. 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition............................................................ 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 14 Part II. Other Information: ----------------- Item 1. Legal Proceedings.................................................................. 15 Item 4. Submission of Matters to a Vote of Security Holders................................ 16 Item 6. Exhibits and Reports on Form 8-K................................................... 16
* Items not listed are inapplicable. Page 2 3 PART I. FINANCIAL INFORMATION CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1999 1998 -------- -------- --------- --------- Revenue: Operating revenue $6,254.3 $5,289.5 $12,083.6 $10,306.9 Bulk deliveries to customer warehouses 1,145.2 999.8 2,099.6 1,781.5 -------- -------- --------- --------- Total revenue 7,399.5 6,289.3 14,183.2 12,088.4 Cost of products sold: Operating cost of products sold 5,532.7 4,634.9 10,707.2 9,060.9 Cost of products sold - bulk deliveries 1,144.9 999.8 2,099.3 1,781.5 -------- -------- --------- --------- Total cost of products sold 6,677.6 5,634.7 12,806.5 10,842.4 Gross margin 721.9 654.6 1,376.7 1,246.0 Selling, general and administrative expenses 415.3 401.4 806.6 775.3 Merger-related costs 5.5 3.1 42.3 37.5 -------- -------- --------- --------- Operating earnings 301.1 250.1 527.8 433.2 Interest expense and other (26.8) (28.9) (51.7) (53.2) -------- -------- --------- --------- Earnings before income taxes 274.3 221.2 476.1 380.0 Provision for income taxes 100.8 79.7 180.6 143.8 -------- -------- --------- --------- Net earnings $ 173.5 $ 141.5 $ 295.5 $ 236.2 ======== ======== ========= ========= Earnings per Common Share: Basic $ 0.62 $ 0.51 $ 1.05 $ 0.85 Diluted $ 0.61 $ 0.50 $ 1.03 $ 0.83 Weighted average number of Common Shares outstanding: Basic 280.4 277.0 280.2 276.9 Diluted 285.1 284.5 285.8 284.2 Cash dividends declared per Common Share $ 0.025 $ 0.025 $ 0.050 $ 0.050 - -------------------------------------------------------------------------------------------------------------------- Net earnings $ 173.5 $ 141.5 $ 295.5 $ 236.2 Pro forma adjustment for income taxes (Note 4) -- 2.8 -- 4.3 -------- -------- --------- --------- Pro forma net earnings $ 173.5 $ 138.7 $ 295.5 $ 231.9 ======== ======== ========= ========= Pro forma earnings per Common Share: Basic $ 0.62 $ 0.50 $ 1.05 $ 0.84 Diluted $ 0.61 $ 0.49 $ 1.03 $ 0.82
See notes to condensed consolidated financial statements. Page 3 4 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN MILLIONS)
DECEMBER 31, JUNE 30, 1999 1999 ------------ --------- ASSETS Current assets: Cash and equivalents $ 290.5 $ 185.4 Trade receivables, net 1,887.8 1,602.1 Current portion of net investment in sales-type leases 166.2 152.5 Inventories 4,041.2 2,940.0 Prepaid expenses and other 540.5 320.6 --------- --------- Total current assets 6,926.2 5,200.6 --------- --------- Property and equipment, at cost 2,904.5 2,798.9 Accumulated depreciation and amortization (1,300.1) (1,237.4) --------- --------- Property and equipment, net 1,604.4 1,561.5 Other assets: Net investment in sales-type leases, less current portion 506.4 454.3 Goodwill and other intangibles 969.4 942.1 Other 273.6 246.0 --------- --------- Total $10,280.0 $ 8,404.5 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable, banks $ 153.8 $ 28.6 Current portion of long-term obligations 9.8 11.6 Accounts payable 3,027.3 2,363.9 Other accrued liabilities 961.6 561.2 --------- --------- Total current liabilities 4,152.5 2,965.3 --------- --------- Long-term obligations, less current portion 1,657.9 1,223.9 Deferred income taxes and other liabilities 608.2 645.7 Shareholders' equity: Common Shares, without par value 1,125.1 1,091.7 Retained earnings 2,802.7 2,544.0 Common Shares in treasury, at cost (17.5) (17.2) Cumulative foreign currency adjustment (43.3) (44.0) Other (5.6) (4.9) --------- --------- Total shareholders' equity 3,861.4 3,569.6 --------- --------- Total $10,280.0 $ 8,404.5 ========= =========
See notes to condensed consolidated financial statements. Page 4 5 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
SIX MONTHS ENDED DECEMBER 31, 1999 1998 --------- ------- Net earnings $ 295.5 $ 236.2 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 125.3 114.4 Provision for bad debts 14.0 5.1 Change in operating assets and liabilities, net of effects from acquisitions: Increase in trade receivables (301.4) (139.5) Increase in inventories (1,102.3) (452.2) Increase in net investment in sales-type leases (65.8) (151.7) Increase in accounts payable 675.5 237.7 Other operating items, net 76.5 67.3 --------- ------- Net cash used in operating activities (282.7) (82.7) --------- ------- Acquisition of subsidiary, net of cash acquired (62.6) (69.6) Proceeds from sale of property and equipment 14.5 2.6 Additions to property and equipment (149.3) (174.5) Other 48.3 (0.9) --------- ------- Net cash used in investing activities (149.1) (242.4) --------- ------- Net change in commercial paper and short-term debt 693.8 142.7 Reduction of long-term obligations (140.8) (19.2) Proceeds from long-term obligations, net of issuance costs -- 161.1 Proceeds from issuance of Common Shares 20.6 34.7 Dividends on Common Shares and cash paid in lieu of fractional shares (14.1) (20.1) Other (22.6) (45.5) --------- ------- Net cash provided by financing activities 536.9 253.7 NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 105.1 (71.4) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 185.4 389.1 --------- ------- CASH AND EQUIVALENTS AT END OF PERIOD $ 290.5 $ 317.7 ========= =======
See notes to condensed consolidated financial statements. Page 5 6 CARDINAL HEALTH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. The condensed consolidated financial statements of Cardinal Health, Inc. (the "Company") include the accounts of all majority-owned subsidiaries and all significant intercompany amounts have been eliminated. The condensed consolidated financial statements contained herein have been restated to give retroactive effect to the merger transactions with Pacific Surgical, Inc. ("PSI") on May 21, 1999 and Automatic Liquid Packaging, Inc. ("ALP") on September 10, 1999, both of which were accounted for as pooling of interests business combinations (see Note 4). These condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles for interim reporting. In the opinion of management, all adjustments necessary for a fair presentation have been included. Except as disclosed elsewhere herein, all such adjustments are of a normal and recurring nature. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999 (the "1999 Form 10-K"). Without limiting the generality of the foregoing, Note 1 of the "Notes to Consolidated Financial Statements" from the 1999 Form 10-K is specifically incorporated herein by reference. Note 2. Basic earnings per Common Share ("Basic") is computed by dividing net earnings (the numerator) by the weighted average number of Common Shares outstanding during each period (the denominator). Diluted earnings per Common Share is similar to the computation for Basic, except that the denominator is increased by the dilutive effect of stock options outstanding, computed using the treasury stock method. Note 3. The Company's comprehensive income consists of net earnings and foreign currency translation adjustments as follows:
For the For the three months ended six months ended December 31, December 31, -------------------- ------------------ (in millions) 1999 1998 1999 1998 ------ ------ ------ ------ Net earnings $173.5 $141.5 $295.5 $236.2 Foreign currency translation gain/(loss) (1.2) 4.1 0.7 3.3 ------ ------ ------ ------ Total comprehensive income $172.3 $145.6 $296.2 $239.5 ====== ====== ====== ======
Note 4. On September 10, 1999, the Company completed a merger transaction with ALP (the "ALP Merger") which was accounted for as a pooling of interests. In the ALP Merger, the Company issued approximately 5.8 million Common Shares to ALP stockholders. On May 21, 1999, the Company completed a merger transaction with PSI (the "PSI Merger") which was accounted for as a pooling of interests. In the PSI Merger, the Company issued approximately 0.2 million Common Shares to PSI stockholders. Page 6 7 The table below presents a reconciliation of total revenue and net earnings available for Common Shares as reported in the accompanying condensed consolidated financial statements with those previously reported by the Company. The term "Cardinal Health" as used in the table below refers to Cardinal Health, Inc. and subsidiaries prior to the ALP and PSI mergers.
Cardinal (in millions) Health ALP PSI Combined -------- --- --- -------- Three months ended December 31, 1998 Total revenue $ 6,269.2 $17.5 $2.6 $ 6,289.3 Net earnings $ 134.1 $ 7.0 $0.4 $ 141.5 Six months ended December 31, 1998 Total revenue $12,050.1 $34.2 $4.1 $12,088.4 Net earnings $ 224.9 $11.0 $0.3 $ 236.2
Adjustments affecting net earnings and shareholders' equity as a result of ALP and PSI adopting the Company's accounting practices were not material for any periods presented herein. In addition, there were no material intercompany transactions. Since April 1998, ALP had been organized as an S-Corporation for tax purposes. Accordingly, ALP was not subject to federal income tax from April 1998 up to the date that the ALP merger transaction was consummated. For the quarter and six months ended December 31, 1998, net earnings would have been reduced by $2.8 million and $4.3 million, respectively, if ALP had been subject to federal income taxes. Pro forma combined net earnings for the three and six months ended December 31, 1999 are $138.7 million and $231.9 million, respectively, taking into consideration ALP income taxes. Note 5. Costs of effecting mergers and subsequently integrating the operations of the various merged companies are recorded as merger-related costs when incurred. During the three and six months ended December 31, 1999, merger-related costs totaling $5.5 million ($3.4 million, net of tax) and $42.3 million ($33.1 million, net of tax) were recorded, respectively. During the six months ended December 31, 1999, approximately $31.6 million related to transaction and employee-related costs associated with the ALP merger transaction and $5.2 million related to exit and employee costs associated with the Company's merger transaction with Allegiance Corporation ("Allegiance"), of which $31.6 million and $4.3 million, respectively were recorded during the first quarter of fiscal year 2000. In addition, $7.0 million was recorded associated with the business restructuring as a result of the Company's merger transaction with R.P. Scherer Corporation ("Scherer"), of which $6.9 million was recorded during the first quarter of fiscal 2000. As part of the business restructuring, the Company is currently closing certain facilities. In connection with such closings, the Company has incurred employee-related costs, asset impairment charges and exit costs related to the termination of contracts and lease agreements. During the first six months of fiscal 2000, the Company recorded costs of $8.8 million related to integrating the operations of companies that previously engaged in merger transactions with the Company. Of these integration costs, $4.3 million were recorded during the quarter ended September 30, 1999. Partially offsetting the total charges recorded was a $10.3 million credit recorded in the first quarter of fiscal 2000 to adjust the estimated transaction and employee-related costs previously recorded in connection with the Allegiance merger transaction. Actual billings and employee-related costs were less than the amounts originally anticipated, resulting in a reduction of the merger-related costs. During the three and six-month periods ended December 31, 1998, merger-related costs totaled $3.1 million ($1.9 million, net of tax) and $37.5 million ($29.7 million, net of tax), respectively. Of the amount recorded, $22.3 million related to transaction and employee-related costs and $12.5 million related to business restructuring and asset impairment costs associated with the Company's merger transaction with Scherer. In addition, the Company recorded costs of $1.1 million related to severance costs for a restructuring associated with the change in management that resulted from the merger with Owen Healthcare, Inc. and $4.8 million related to integrating the operations of companies that previously engaged in merger transactions with the Company, of which $1.8 million was recorded during the first quarter of fiscal 1999. Partially offsetting the charge recorded was a $3.2 million credit, of which $2.2 million was recorded during the first quarter of fiscal 1999, to adjust the estimated transaction and termination costs previously recorded in connection with the canceled merger transaction with Bergen Brunswig Corporation. The actual billings for services provided by third parties engaged by the Company were less than the estimate, resulting in a reduction of the merger-related costs. Page 7 8 The net of tax effect of the various merger-related costs recorded and pro forma adjustments related to ALP taxes (see Note 4) during the three months ended December 31, 1999 and 1998 was to reduce net earnings by $3.4 million to $173.5 million and to increase net earnings by $0.9 million to $141.5 million, respectively, and to reduce reported diluted earnings per Common Share by $0.01 per share to $0.61 per share and to increase reported diluted earnings per Common Share by $0.01 per share to $0.50 per share, respectively. The net of tax effect of the various merger-related costs recorded and pro forma adjustments related to ALP taxes during the six months ended December 31, 1999 and 1998 was to reduce net earnings by $33.1 million to $295.5 million and by $25.4 million to $236.2 million, respectively, and to reduce reported diluted earnings per Common Share by $0.12 per share to $1.03 per share and by $0.09 per share to $0.83 per share, respectively. Note 6. The Company is organized based on the products and services it offers. Under this organizational structure, the Company operates in three business segments: Pharmaceutical Distribution, Pharmaceutical Services and Medical-Surgical Products. The Company has not made any significant changes in the segments reported or the basis of measurement of segment profit or loss from the information provided in the Company's 1999 Form 10-K. The Pharmaceutical Distribution segment involves the distribution of a broad line of pharmaceuticals, health and beauty care products, therapeutic plasma and other specialty pharmaceutical products and additional items typically sold by hospitals, retail drug stores and other health-care providers. The Pharmaceutical Services segment provides services to the health-care industry through the design of unique drug delivery systems, contract manufacturing, comprehensive packaging services, integrated pharmacy management, reimbursement services, clinical information system services and pharmacy automation equipment. The Medical-Surgical Products segment involves the manufacture of medical, surgical and laboratory products and the distribution of these products to hospitals, physician offices, surgery centers and other health-care providers. The Company evaluates the performance of the segments based on operating earnings after the corporate allocation of administrative expenses. Information about interest income and expense, and income taxes is not provided on a segment level. In addition, special charges are not allocated to the segments. The following table includes revenue and operating earnings for the three months ended December 31, 1999 and 1998 for each segment and reconciling items necessary to equal amounts reported in the consolidated financial statements:
For the three months ended For the six months ended (in millions) December 31, December 31, -------------------------- ------------------------ Net Revenue: 1999 1998 1999 1998 -------- -------- --------- --------- Operating revenue: Pharmaceutical Distribution $4,509.9 $3,622.0 $ 8,693.1 $ 7,067.7 Pharmaceutical Services 552.6 536.7 1,062.8 1,026.9 Medical-Surgical Products 1,279.2 1,209.3 2,492.0 2,358.9 Inter-segment (1) (87.4) (78.5) (164.3) (146.6) -------- -------- --------- --------- Total operating revenue 6,254.3 5,289.5 12,083.6 10,306.9 Bulk Deliveries to Customer Warehouses: Pharmaceutical Distribution 1,145.2 999.8 2,099.6 1,781.5 -------- -------- --------- --------- Total Net Revenue $7,399.5 $6,289.3 $14,183.2 $12,088.4 ========================================================================================
Page 8 9
For the For the three months ended six months ended December 31, December 31, -------------------- ------------------- Operating Earnings: 1999 1998 1999 1998 ------ ------ ------ ------ Pharmaceutical Distribution $118.1 $ 93.8 $224.7 $175.7 Pharmaceutical Services 107.1 91.9 186.6 160.7 Medical-Surgical Products 88.9 73.5 175.5 144.6 Corporate (2) (13.0) (9.1) (59.0) (47.8) ------ ------ ------ ------ Total Operating Earnings $301.1 $250.1 $527.8 $433.2 ===============================================================================
(1) Inter-segment revenue consists primarily of the elimination of inter-segment activity - primarily sales from Pharmaceutical Distribution to Pharmaceutical Services. Sales from one segment to another are priced at the equivalent external customer selling prices. (2) Corporate operating earnings primarily consist of merger-related costs of $5.5 million and $3.1 million for the three months ended December 31, 1999 and 1998 and $42.3 million and $37.5 million for the six months ended December 31, 1999 and 1998, respectively, and unallocated corporate depreciation and amortization and administrative expenses. Note 7. On September 30, 1996, Baxter International Inc. ("Baxter") and its subsidiaries transferred to Allegiance and its subsidiaries their U.S. Healthcare distribution business, surgical and respiratory therapy business and healthcare cost-saving business, as well as certain foreign operations (the "Allegiance Business") in connection with a spin-off of the Allegiance Business by Baxter. In connection with this spin-off, Allegiance, which merged with the Company on February 3, 1999, assumed the defense of litigation involving claims related to the Allegiance Business from Baxter, including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves. Since none of the cases involving natural rubber latex gloves has proceeded to a hearing on the merits, the Company is unable to evaluate the extent of any potential liability, and unable to estimate any potential loss. Because of the increase in claims filed and the ongoing defense costs that will be incurred, the Company believes it is probable that it will continue to incur significant expenses related to the defense of cases involving natural rubber latex gloves. The Company believes a substantial portion of any potential liability and defense costs, excluding defense costs already reserved, relating to natural latex gloves cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. Although the ultimate resolution of litigation cannot be forecast with certainty, the Company does not believe that the outcome of any pending litigation would have a material adverse effect on the Company's consolidated financial statements. Note 8. As of July 1, 1999, the Company adopted the Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for costs of computer software developed or obtained for internal use. The adoption of this statement did not have a material impact on the Company's financial statements. On November 24, 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 100 ("SAB 100"), "Restructuring and Impairment Charges." SAB 100 provides the SEC staff's views regarding the accounting for and disclosure of certain expenses commonly reported in connection with exit activities and business combinations. The Company believes that its current accounting procedures related to these expenses comply with SAB 100. On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." While not intended to change current literature related to revenue recognition, SAB 101 provides additional guidance on revenue recognition policies and procedures. The Company does not anticipate that the issuance of SAB 101 will have a material impact on the consolidated financial statements. Page 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Management's discussion and analysis presented below has been prepared to give retroactive effect to the pooling of interests business combinations with Pacific Surgical, Inc. ("PSI") on May 21, 1999 and Automatic Liquid Packaging, Inc. ("ALP") on September 10, 1999. The discussion and analysis is concerned with material changes in financial condition and results of operations for the Company's condensed consolidated balance sheets as of December 31, 1999 and June 30, 1999, and for the condensed consolidated statements of earnings for the three and six month periods ended December 31, 1999 and 1998. This discussion and analysis should be read together with management's discussion and analysis included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Portions of management's discussion and analysis presented below include "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe", "expect", "anticipate", "project", and similar expressions, among others, identify "forward-looking statements", which speak only as of the date the statement was made. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to materially differ from those made, projected or implied. The most significant of such risks, uncertainties and other factors are described in Exhibit 99.01 to this Form 10-Q and are incorporated herein by reference. The Company disclaims any obligation to update any forward-looking statement. GENERAL The Company operates within three operating business segments: Pharmaceutical Distribution, Pharmaceutical Services and Medical-Surgical Products. See Note 6 of "Notes to Condensed Consolidated Financial Statements" for a description of these segments. RESULTS OF OPERATIONS Operating Revenue
Three months ended Six months ended December 31, 1999 December 31, 1999 ------------------------------------------------------------------- Percent of Total Percent of Total Growth (1) Operating Revenues Growth (2) Operating Revenues - ------------------------------------------------------------------------------------------------------------ Pharmaceutical Distribution 25% 71% 23% 71% Pharmaceutical Services 3% 9% 3% 9% Medical-Surgical Products 6% 20% 6% 20% Total Company 18% 100% 17% 100% - ------------------------------------------------------------------------------------------------------------
(1) The growth rate applies to the three-month period ended December 31, 1999 as compared to the corresponding period of the prior year. (2) The growth rate applies to the six-month period ended December 31, 1999 as compared to the corresponding period of the prior year. Operating revenue for the three and six months ended December 31, 1999 increased 18% and 17% as compared to the same period in the prior year. The majority of the operating revenue increase (approximately 85% and 81%, respectively for the three and six-month periods ended December 31, 1999) came from existing customers in the form of increased volume and price increases. The remainder of the growth came from the addition of new customers. The Pharmaceutical Distribution segment's operating revenue growth over the three and six months ended December 31, 1999 was primarily related to strong sales to all customer segments, especially to retail pharmacy chains and through the Company's specialty distribution businesses. All operating revenue growth was internal. Page 10 11 The operating revenue growth for the Pharmaceutical Services segment was primarily a result of growth in the Company's pharmaceutical drug delivery systems, comprehensive packaging services and contract manufacturing businesses. The recent pharmaceutical introductions in the form of the Company's proprietary drug delivery formulations and sales of health and nutritional products in Asia contributed to this revenue growth. In addition, the comprehensive packaging services and the contract manufacturing businesses have contributed to the revenue growth through the receipt of contracts on new products and organic growth of existing products under contract. Offsetting this growth was the impact of the pharmacy management business continuing to exit unprofitable accounts and temporarily flat sales in the pharmacy automation business due to customers delaying purchases to focus internally on their Y2K readiness. The Medical-Surgical Products segment's operating revenue growth was due to an increase in sales for all product lines. In particular, sales of distributed products increased during the quarter and six-month periods. In addition, international and service revenues for the Medical-Surgical Products segment increased over the comparable quarter of fiscal 1999. Several multiple year contracts have contributed to this growth. Bulk Deliveries to Customer Warehouses. The Company reports as revenue bulk deliveries made to customers' warehouses, whereby the Company acts as an intermediary in the ordering and subsequent delivery of pharmaceutical products. Fluctuations in bulk deliveries result largely from circumstances that are beyond the control of the Company, including consolidation within customers' industries, decisions by customers to either begin or discontinue warehousing activities, and changes in policies by manufacturers related to selling directly to customers. Due to the lack of margin generated through bulk deliveries, fluctuations in their amount have no significant impact on the Company's operating earnings. Gross Margin
Three Months Ended Six Months Ended December 31, December 31, - ------------------------------------------------------------------------------------------------------- (As a percentage of operating revenue) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------- Pharmaceutical Distribution 5.02% 5.29% 5.03% 5.17% Pharmaceutical Services 36.28% 33.27% 34.46% 32.43% Medical-Surgical Products 22.97% 23.53% 22.99% 23.20% Total Company 11.54% 12.37% 11.39% 12.09% - -------------------------------------------------------------------------------------------------------
The decrease in gross margin from the three and six months ended December 31, 1998 to the comparable periods of fiscal 2000 was due primarily to a greater mix of lower margin pharmaceutical distribution during the first half of fiscal 2000 compared to the same period a year ago. The Pharmaceutical Distribution segment's mix increased to 71% of total operating revenues for the three and six months ended December 31, 1999 from 67% and 68% for the comparable periods of the prior year, respectively. The Pharmaceutical Distribution segment's gross margin as a percentage of operating revenue decreased primarily as a result of lower selling margins due to a greater mix of sales to retail pharmacy chains which have a relatively lower margin in connection with a lower cost of service (see discussion in selling, general and administrative expenses). This decrease was partially offset by higher vendor margins from favorable price increases and manufacturer marketing programs. The increase in the Pharmaceutical Services segment's gross margin was due primarily to the drug delivery development business' improvement as a result of a shift in mix to higher margin pharmaceutical products from lower margin health and nutrition products. In addition, the pharmacy management contract rationalization program has resulted in improved gross margins. Gross margin was also favorably impacted by an improvement in manufacturing processes as a result of improved productivity, ongoing plant modernization and rationalization programs. The decrease in the Medical-Surgical Products segment's gross margin was primarily due to a shift in mix between distributed and self-manufactured products, as well as competitive pressures in the latex glove business. Competition in the cyclical exam gloves market has become focused on price resulting in temporarily decreased margins for manufacturers. Page 11 12 Selling, General and Administrative Expenses
Three Months Ended Six Months Ended December 31, December 31, - ------------------------------------------------------------------------------------------------------- (As a percentage of operating revenue) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------- Pharmaceutical Distribution 2.40% 2.70% 2.43% 2.69% Pharmaceutical Services 16.90% 16.14% 16.90% 16.78% Medical-Surgical Products 16.02% 17.46% 15.95% 17.07% Total Company 6.64% 7.59% 6.67% 7.52% - -------------------------------------------------------------------------------------------------------
The improvement in selling, general and administrative expenses as a percentage of operating revenue for the three and six months ended December 31, 1999 reflects economies of scale associated with the Company's revenue growth, as well as significant productivity gains resulting from continued cost control efforts and the consolidation and selective automation of operating facilities. In addition, the Company is continuing to take advantage of synergies from recent acquisitions to decrease selling, general and administrative expenses as a percentage of operating revenues. The 3% and 4% growth in selling, general and administrative expenses experienced in the three and six months ended December 31, 1999, respectively, compared to the same period a year ago, was due primarily to increases in personnel costs and depreciation expense, and compares favorably to the 18% and 17% growth in operating revenue for the same respective periods. Merger-Related Costs. Costs of effecting mergers and subsequently integrating the operations of the various merged companies are recorded as merger-related costs when incurred. During the three and six months ended December 31, 1999, merger-related costs totaling $5.5 million ($3.4 million, net of tax) and $42.3 million ($33.1 million, net of tax) were recorded, respectively. During the six months ended December 31, 1999, approximately $31.6 million related to transaction and employee-related costs associated with the ALP merger transaction and $5.2 million related to exit and employee costs associated with the Company's merger transaction with Allegiance Corporation ("Allegiance"), of which $31.6 million and $4.3 million, respectively were recorded during the first quarter of fiscal year 2000. In addition, $7.0 million was recorded associated with the business restructuring as a result of the Company's merger transaction with R.P. Scherer Corporation ("Scherer"), of which $6.9 million was recorded during the first quarter of fiscal 2000. As part of the business restructuring, the Company is currently closing certain facilities. In connection with such closings, the Company has incurred employee-related costs, asset impairment charges and exit costs related to the termination of contracts and lease agreements. During the first six months of fiscal 2000, the Company recorded costs of $8.8 million related to integrating the operations of companies that previously engaged in merger transactions with the Company. Of these integration costs, $4.3 million were recorded during the quarter ended September 30, 1999. Partially offsetting the total charges recorded was a $10.3 million credit recorded in the first quarter of fiscal 2000 to adjust the estimated transaction and employee-related costs previously recorded in connection with the Allegiance merger transaction. Actual billings and employee-related costs were less than the amounts originally anticipated, resulting in a reduction of the merger-related costs. During the three and six-month periods ended December 31, 1998, merger-related costs totaled $3.1 million ($1.9 million, net of tax) and $37.5 million ($29.7 million, net of tax), respectively. Of the amount recorded, $22.3 million related to transaction and employee-related costs and $12.5 million related to business restructuring and asset impairment costs associated with the Company's merger transaction with Scherer. In addition, the Company recorded costs of $1.1 million related to severance costs for a restructuring associated with the change in management that resulted from the merger with Owen Healthcare, Inc. and $4.8 million related to integrating the operations of companies that previously engaged in merger transactions with the Company, of which $1.8 million was recorded during the first quarter of fiscal 1999. Partially offsetting the charge recorded was a $3.2 million credit, of which $2.2 million was recorded during the first quarter of fiscal 1999, to adjust the estimated transaction and termination costs previously recorded in connection with the canceled merger transaction with Bergen Brunswig Corporation. The actual billings for services provided by third parties engaged by the Company were less than the estimate, resulting in a reduction of the merger-related costs. Since April 1998, ALP had been organized as an S-Corporation for tax purposes. Accordingly, ALP was not subject to federal income tax from April 1998 up to the date that the ALP merger transaction was consummated. For the quarter and six months ended December 31, 1998, net earnings would have been reduced by $2.8 million and $4.3 million, respectively, if ALP had been subject to federal income taxes. Page 12 13 The net of tax effect of the various merger-related costs recorded and pro forma adjustments related to ALP taxes during the three months ended December 31, 1999 and 1998 was to reduce net earnings by $3.4 million to $173.5 million and to increase net earnings by $0.9 million to $141.5 million, respectively, and to reduce reported diluted earnings per Common Share by $0.01 per share to $0.61 per share and to increase reported diluted earnings per Common Share by $0.01 per share to $0.50 per share, respectively. The net of tax effect of the various merger-related costs recorded and pro forma adjustments related to ALP taxes during the six months ended December 31, 1999 and 1998 was to reduce net earnings by $33.1 million to $295.5 million and by $25.4 million to $236.2 million, respectively, and to reduce reported diluted earnings per Common Share by $0.12 per share to $1.03 per share and by $0.09 per share to $0.83 per share, respectively. The Company estimates that it will incur additional merger-related costs associated with the various mergers it has completed to date (primarily related to the Scherer, Allegiance and ALP mergers) of approximately $91.8 million ($58.4 million, net of tax) in future periods (primarily fiscal 2000 and 2001) related to the exit of contractual arrangements, employee-related costs, and costs to properly integrate operations and implement efficiencies. Such amounts will be charged to expense when incurred. Provision for Income Taxes. The Company's provision for income taxes relative to pre-tax earnings was 37% and 36% for the second quarter of fiscal 2000 and 1999, respectively. The increase in the effective tax rate for the second quarter over the corresponding period of prior year is due primarily to nondeductible items associated with the current year's business combinations and the change in ALP tax status (see Note 5 to the "Notes to Condensed Consolidated Financial Statements"). For the six-month periods ended December 31, 1999 and 1998, the Company's income tax provision as a percentage of pre-tax earnings was 38% for both periods. LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $2.8 billion at December 31, 1999 from $2.2 billion at June 30, 1999. This increase from June 30, 1999 included additional investments in inventories and trade receivables of $1.1 billion and $285.7 million, respectively. Offsetting the increases in working capital was an increase in accounts payable of $663.4 million. The Company's inventory levels have risen due to the higher volume of current and anticipated business in pharmaceutical distribution activities. In addition, the Company invested in supplemental inventory to cover possible year 2000 issues. A portion of the inventory increase can also be attributed to the Company investing in inventories in conjunction with various vendor-margin programs. The increase in trade receivables is consistent with the Company's operating revenue growth (see "Operating Revenue" above) and the change in accounts payable is due primarily to the timing of inventory purchases and related payments. The Company has a commercial paper program, providing for the issuance of up to $750 million in aggregate maturity value of commercial paper. At December 31, 1999, commercial paper with an effective interest rate of 5.78% and an aggregate maturity value of $629.9 million was outstanding. At June 30, 1999, the outstanding commercial paper balance was $49.2 million with an effective interest rate of 4.82%. Property and equipment, at cost, increased by $105.6 million from June 30, 1999. The increase was primarily due to ongoing plant expansion and manufacturing equipment purchases in certain service businesses, as well as additional investments made for management information systems and upgrades to distribution facilities. Shareholders' equity increased to $3.9 billion at December 31, 1999 from $3.6 billion at June 30, 1999, primarily due to net earnings of $295.5 million and the investment of $20.6 million by employees of the Company through various stock incentive plans which are offset by dividends of $14.1 million and a $22.3 million payment related to the repurchase of ALP common shares. The Company believes that it has adequate capital resources at its disposal to fund currently anticipated capital expenditures, business growth and expansion, and current and projected debt service requirements. See "Other" below. Page 13 14 OTHER Year 2000 Project. The Company utilizes computer technologies in each of its businesses to effectively carry out its day-to-day operations. Computer technologies include both information technology in the form of hardware and software, as well as embedded technology in the Company's facilities and equipment. Similar to most companies, the Company had to determine whether its systems were capable of recognizing and processing date sensitive information properly in the year 2000. The Company's year 2000 plan was described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. The Company believes it has been able to modify, replace, or mitigate its affected systems in time to avoid any material detrimental impact on its operations. In addition, the Company has taken steps to monitor the progress made by significant suppliers, customers and critical business partners, and has tested critical interfaces for the year 2000 readiness. While the Company is not presently aware of any significant probability that its systems have not been properly remediated, there can be no assurances that contingency plans will sufficiently mitigate the risk of an unanticipated year 2000 readiness problem Since the initiation of the year 2000 project, the Company estimates that it has incurred costs of approximately $26.4 million of which approximately $7.6 million represented incremental costs. To date, the Company has not experienced any significant year 2000 related system failures nor, to its knowledge, have any of its significant suppliers and customers. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes there has been no material change in its exposure to market risk from that discussed in the Company's Form 10-K for the fiscal year ended June 30, 1999. Page 14 15 PART II. OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The following disclosure should be read together with the disclosure set forth in the Company's Form 10-K for the fiscal year ended June 30, 1999, and to the extent any such statements constitute "forward looking statements" reference is made to Exhibit 99.01 of this Form 10-Q. In November 1993, the Company and Whitmire Distribution Corporation ("Whitmire"), one of the Company's wholly-owned subsidiaries, as well as other pharmaceutical wholesalers, were named as defendants in a series of purported class action lawsuits which were later consolidated and transferred by the Judicial Panel for Multi-District Litigation to the United States District Court for the Northern District of Illinois. Subsequent to the consolidation, a new consolidated complaint was filed which included allegations that the wholesaler defendants, including the Company and Whitmire, conspired with manufacturers to inflate prices using a chargeback pricing system. The wholesaler defendants, including the Company and Whitmire, entered into a Judgment Sharing Agreement whereby the total exposure for the Company and its subsidiaries is limited to $1,000,000 or 1% of any judgment against the wholesalers and the manufacturers, whichever is less, and provided for a reimbursement mechanism for legal fees and expenses. The trial of the class action lawsuit began on September 23, 1998. On November 19, 1998, after the close of plaintiffs' case-in-chief, both the wholesaler defendants and the manufacturer defendants moved for judgment as a matter of law in their favor. On November 30, 1998, the Court granted both of these motions and ordered judgment as a matter of law in favor of both the wholesaler defendants and the manufacturer defendants. On January 25, 1999, the class plaintiffs filed a notice of appeal of the District Court's decision with the Court of Appeals for the Seventh Circuit. On July 13, 1999, the Court of Appeals for the Seventh Circuit issued its decision, which, in part, affirmed the dismissal of the wholesaler defendants, including the Company and Whitmire. On July 27, 1999, the class plaintiffs filed a Petition for Rehearing with the Court of Appeals for the Seventh Circuit, which was denied. On November 5, 1999, the class plaintiffs filed a petition for writ of certiorari with the United States Supreme Court. In addition to the federal court cases described above, the Company and Whitmire have also been named as defendants in a series of related antitrust lawsuits brought by chain drug stores and independent pharmacies who opted out of the federal class action lawsuits, and in a series of state court cases alleging similar claims under various state laws regarding the sale of brand name prescription drugs. The Judgment Sharing Agreement mentioned above also covers these litigation matters. On September 30, 1996, Baxter International, Inc. ("Baxter") and its subsidiaries transferred to Allegiance and its subsidiaries their U.S. health-care distribution business, surgical and respiratory therapy business and health-care cost-saving business, as well as certain foreign operations (the "Allegiance Business") in connection with a spin-off of the Allegiance Business by Baxter. In connection with this spin-off, Allegiance, which merged with the Company on February 3, 1999, assumed the defense of litigation involving claims related to the Allegiance Business from Baxter Healthcare Corporation ("BHC"), including certain claims of alleged personal injuries as a result of exposure to natural rubber latex gloves described below. Allegiance will be defending and indemnifying BHC, as contemplated by the agreements between Baxter and Allegiance, for all expenses and potential liabilities associated with claims pertaining to the litigation assumed by Allegiance. As of December 31, 1999, there were approximately 486 lawsuits involving BHC and/or Allegiance containing allegations of sensitization to natural rubber latex products. Since none of these cases has proceeded to a hearing on the merits, the Company is unable to evaluate the extent of any potential liability, and unable to estimate any potential loss. Because of the increase in claims filed and the ongoing defense costs that will be incurred, the Company believes it is probable that it will continue to incur significant expenses related to the defense of cases involving natural rubber latex gloves. The Company believes a substantial portion of any potential liability and defense costs, excluding defense costs already reserved, relating to natural latex gloves cases and claims will be covered by insurance, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. The Company also becomes involved from time-to-time in other litigation (including environmental matters) incidental to its business. Although the ultimate resolution of the litigation referenced in this Item 1 cannot be forecast with certainty, the Company does not believe that the outcome of these lawsuits would have a material adverse effect on the Company's consolidated financial statements. Page 15 16 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) Registrant's 1999 Annual Meeting of Shareholders was held on November 3, 1999. (b) Proxies were solicited by Registrant's management pursuant to Regulation 14A under the Securities Exchange Act of 1934; there was no solicitation in opposition to management's nominees as listed in the proxy statement; and all director nominees were elected to the class indicated in the proxy statement pursuant to the vote of the Registrant's shareholders. (c) Matters voted upon at the Annual Meeting were as follows: (i) Election of Regina E. Herzlinger, John C. Kane, J. Michael Losh, John B. McCoy, and Michael D. O'Halleran. The results of the shareholder vote were as follows: Mrs. Herzlinger - 242,017,803 for, 0 against, 2,295,079 withheld, and 0 broker non-votes; Mr. Kane - 241,998,472 for, 0 against, 2,314,410 withheld, and 0 broker non-votes; Mr. Losh - 242,075,613 for, 0 against, 2,237,269 withheld, and 0 broker non-votes; Mr. McCoy - 242,016,568 for, 0 against, 2,296,314 withheld, and 0 broker non-votes; Mr. O'Halleran - 242,030,618 for, 0 against, 2,282,264 withheld, and 0 broker non-votes. (ii) Adoption of the Cardinal Health, Inc. Employee Stock Purchase Plan pursuant to Section 423(b) of the Internal Revenue Code. The results of the shareholder vote were as follows: 241,021,665 for, 2,874,793 against, 416,424 withheld, and 0 broker non-votes. (iii) Re-approval of the Performance Goals under the Cardinal Health, Inc. Equity Incentive Plan relating to Section 162(m) of the Internal Revenue Code. The results of the shareholder vote were as follows: 238,733,365 for, 4,833,411 against, 746,106 withheld, and 0 broker non-votes. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K: (a) Listing of Exhibits: Exhibit Number Exhibit Description ------ ------------------- 10.01 Employment Agreement between Stephen S. Thomas and the Registrant* 27.01 Financial Data Schedule - Six months ended December 31, 1999 27.02 Financial Data Schedule - Six months ended December 31, 1998 99.01 Statement Regarding Forward-Looking Information - -------------- * Management contract or compensation plan or arrangement (b) Reports on Form 8-K: None. Page 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARDINAL HEALTH, INC. Date: February 11, 2000 By: /s/ Robert D. Walter ------------------------------------ Robert D. Walter Chairman and Chief Executive Officer By: /s/ Richard J. Miller ------------------------------------ Richard J. Miller Executive Vice President and Chief Financial Officer Page 17 EX-10.01 2 EXHIBIT 10.01 1 EXHIBIT 10.01 EMPLOYMENT AGREEMENT This is an agreement between Cardinal Health, Inc., an Ohio corporation (the "Company" ) and Stephen S. Thomas (the "Executive"), dated as of the 1st day of July, 1999, to be performed and executed in Dublin, Ohio. 1. Employment Period. The Company shall employ the Executive, and the Executive hereby accepts such employment, on the terms and conditions set forth in this Agreement, for the period commencing on July 1, 1999 (the "Effective Date") and ending on the third anniversary of the Effective Date (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, the Executive shall be employed by the Company, and shall perform such duties and responsibilities of an executive nature as may be determined from time to time by the Company's Board of Directors (the "Board") or its lawfully designated representative. (b) During the Employment Period, the Executive shall devote his full time and attention to the business and affairs of the Company, and shall use his best efforts to promote and establish the business of the Company and to carry out faithfully and efficiently the responsibilities assigned to him under this Agreement. It shall not be considered a violation of the foregoing for the Executive to (i) serve on corporate boards with the approval of Cardinal, (ii) serve on civic or charitable boards or committees, and (iii) manage personal investments, so long as such activities do not interfere with the performance of the Executive's responsibilities under this Agreement. 3. Compensation. (a) Base Salary. During the Employment Period, the Company shall pay the Executive a base salary (the "Base Salary") at an annual rate of $336,050, payable in accordance with the Company's payroll practices for management personnel, as in effect from time to time (but not less frequently than monthly). During the Employment Period, the Base Salary shall be reviewed for possible increase annually in accordance with the Company's normal payroll practices for management personnel. Any increase in the Base Salary shall not limit, expand or reduce any other obligation of the Company under this Agreement. (b) Annual Bonus. In addition to the Base Salary, during the Employment Period the Executive shall be eligible to receive annual bonuses (each, regardless of whether for a 12-month period or a different period, an "Annual Bonus") pursuant to this Section 3(b). The Annual Bonus shall be determined and paid at the sole discretion of the Company pursuant to the terms and conditions of the Company's standard Management Incentive Plan as in effect from time to time, or any successor thereto (the "MIP"), with an MIP potential equal to 85 percent of the Base Salary. (c) Other Benefits. During the Employment Period, the Executive shall be entitled to participate in the group health, life, disability insurance, retirement savings and other employee benefit plans (collectively, "Group Plans") generally offered to the Company's employees in accordance with the standard terms and conditions of such plans as in effect from 2 time to time. In addition, the Executive shall be eligible to participate in the Company's Equity Incentive Plan or any successor thereto (the "Cardinal Stock Plan"), although the actual awards and benefits, if any, to be granted to the Executive thereunder shall be in the sole discretion of the Compensation and Personnel Committee of the Company's Board of Directors. The Employee shall at all times comply with the Company's policies on option exercises and the selling and buying of Company stock. (d) Expenses. The Company shall reimburse the Executive for all reasonable business expenses incurred by the Executive in the performance of his services hereunder for the Company, which expenses shall be substantiated to the reasonable satisfaction of the Company, in a manner similar to that applicable to other management personnel of the Company, and the Executive shall provide all necessary records to reflect the reasonable business expenses incurred. (e) Vacation. During the Employment Period, the Executive shall be entitled to annual paid vacations as provided in the Company's vacation policy as in effect as of the Effective Date, as it may be revised thereafter from time to time. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means the illness or disability of the Executive which prevents or hampers the performance of his obligations hereunder, and which continues for a consecutive period of one hundred and twenty (120) days or longer or an aggregate period of one hundred and eighty (180) days or longer, in either instance during the Employment Period. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective upon receipt of such notice by the Executive (the "Disability Effective Date"). (b) By the Company. The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" shall mean (A) fraud, misappropriation, embezzlement or material misconduct on the part of the Executive, (B) the Executive's (x) failure to substantially perform his duties for the Company when and to the extent requested by the Board or its lawfully designated representative to do so and (y) failure to correct same within five (5) business days after notice from the Board or its lawfully designated representative requesting the Executive to do so, or (C) the Executive's breach of any material provision of this Agreement, the Certificate of Compliance with Company Policies then applicable to management personnel of the Company, or other agreements between the Executive and the Company and such breach continues for a period of five (5) business days after notice from the Board or its lawfully designated representative of such breach. A termination of the Executive's employment by the Company without Cause shall be effected by giving the Executive five (5) business days written notice of the termination. (c) Good Reason. (i) The Executive may terminate employment for Good Reason or without Good Reason. "Good Reason" means: 2 3 (A) the assignment to the Executive of duties inconsistent in any material respect with Section 2(a) of this Agreement, other than any such action that is remedied by the Company within five (5) business days after receipt of notice thereof from the Executive; or (B) any failure by the Company to comply with any provision of Section 3 of this Agreement other than any such failure that is remedied by the Company within five (5) business days after receipt of notice thereof from the Executive. (ii) A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice of Termination for Good Reason") of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the fifth business day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than 30 days after the notice is given); provided, that such a termination of employment shall not become effective if the Company shall have substantially corrected the circumstance giving rise to the Notice of Termination within such period. (d) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or by the Executive for Good Reason is effective, the date on which the Company gives the Executive notice of a termination of employment without Cause, or the date on which the Executive gives the Company notice of a termination of employment without Good Reason, as the case may be. 5. Obligations of the Company upon Termination. (a) Death, Disability, Cause; Without Good Reason. If, during the Employment Period, the Executive's employment is terminated because of death, Disability, for Cause, or by the Executive without Good Reason, then the Executive shall not be entitled to any compensation provided for under this Agreement, other than Base Salary through the Termination Date, benefits under any long-term disability insurance coverage in the case of termination because of Disability, and (without limiting the provisions of Section 6 hereof) vested benefits, if any, required to be paid or provided by law. (b) Without Cause; Good Reason. If, during the Employment Period, the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason (collectively, an "Eligible Termination"), the Executive shall not be entitled to any compensation provided for under this Agreement except as set forth in the following three sentences. If the Eligible Termination occurs prior to the second anniversary of the Effective Date, then the Company (i) shall continue to pay the Executive his Base Salary, at the rate then in effect, for and with respect to the period beginning on the date of such termination of employment and ending on the last day of the Employment Period (hereinafter, the "Continuation 3 4 Period") in the same manner as specified in Section 3(a) hereof; and (ii) shall pay the Executive, in lieu of annual bonuses pursuant to Section 3(b), an annual amount equal to the Executive's most recent previous annual bonus actually paid at the same time and in the same manner as such annual bonuses would have been paid during the Continuation Period pursuant to Section 3(b). If the Eligible Termination occurs on or after the second anniversary of the Effective Date, then the Company (i) shall continue to pay the Executive his Base Salary, at the rate then in effect, for and with respect to the period beginning on the date of such termination of employment and ending on the first anniversary of such date; and (ii) shall pay the Executive, in lieu of an annual bonus pursuant to Section 3(b), an amount equal to the Executive's most recent previous annual bonus actually paid at the same time and in the same manner as such annual bonus would have been paid had the Executive continued to be employed by the Company during such one year period. 6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Executive may qualify, nor, subject to Section 9(f), shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any agreement with the Company. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company on or after the Date of Termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 7. Confidential Information; Business Interference; Noncompetition; Inventions. (a) Both during his association with the Company or the Affiliated Companies (as defined below) and at all times thereafter, Executive shall not disclose to anyone else, directly or indirectly, any confidential, proprietary or business-sensitive information or trade secrets concerning or relating to the business of the Company or the Affiliated Companies (collectively, "Confidential Information") or use, or permit or assist, by acquiescence or otherwise, anyone else to use, directly or indirectly, any such Confidential Information. "Confidential Information" is information not generally known to the public and which, if released to unauthorized persons, could be detrimental to the reputation or business interests of the Company or the Affiliated Companies or parties with which the Company or the Affiliated Companies contract, or which could permit such unauthorized persons to benefit improperly. Examples of Confidential Information include, but are not limited to, the following: strategic business plans; computer materials such as software programs or documentation; information concerning the Company's and the Affiliated Companies' customers and potential customers, including their identities, contact persons, requirements, preferences, pricing or contract terms; marketing and sales information; research and development plans or data; budgets and unpublished financial statements; pricing information and cost data; information concerning the skills and compensation of other employees of the Company or the Affiliated Companies; and information concerning the suppliers of the Company and the Affiliated Companies. The foregoing restrictions shall not apply to disclosure of information by the Executive as may be required in the proper conduct of his duties on behalf of the Company or the Affiliated Companies or as may be specifically authorized in writing by the Company's chief executive officer, president, or chief 4 5 financial officer. Upon termination of employment with the Company for any reason, Executive shall promptly deliver to the Company all property belonging to the Company and the Affiliated Companies and shall not retain any copies or reproductions of correspondence, reports, proposals, lists, computer programs or files, or other information relating in any way to the affairs of the Company or the Affiliated Companies. (b) Both during his association with the Company and at all times thereafter, Executive shall not take any action which is intended to or would disparage or diminish the reputation of the Company or the Affiliated Companies. In addition, while associated with the Company and for a period of two (2) years after expiration or termination of employment or other association with the Company, Executive shall not directly or indirectly, employ, contact concerning employment, or participate in any way in the recruitment for employment (whether as an employee, officer, director, agent, consultant or independent contractor) of any person who was or is at any time during the previous 12 months an employee, representative, officer, or director of the Company or any of the Affiliated Companies. (c) During the Noncompetition Period (as defined below), the Executive shall not, without the prior written consent of the Board, engage in or become associated with a Competitive Activity. For purposes of this Section 7(c): (i) the "Noncompetition Period" means (A) the period during which the Executive is employed by the Company, plus (B) one year; (ii) a "Competitive Activity" means any business or other endeavor, in the United States or Canada or any other country, of a kind then being conducted by the Company or any of the Affiliated Companies in such country; and (v) the Executive shall be considered to have become "associated with a Competitive Activity" if he becomes directly or indirectly involved as an owner, principal, employee, officer, director, independent contractor, representative, stockholder, financial backer, agent, partner, advisor, lender, or in any other individual or representative capacity with any individual, partnership, corporation, other organization or entity that is engaged in a Competitive Activity. Notwithstanding the foregoing, the Executive may make and retain investments during the Employment Period in not more than five percent of the equity of any entity engaged in a Competitive Activity, if such equity is listed on a national securities exchange or regularly traded in an over-the-counter market. Should this provision be unenforceable in any jurisdiction because it is deemed too broad, as to time, area, subject matter, or otherwise, this provision shall be deemed modified to the extent necessary to be enforceable in such jurisdiction. (d) As special consideration for the Executive's agreement to be bound by the provisions of Section 7(c), the receipt and adequacy of which is hereby confirmed and acknowledged, he is receiving, as of the Effective Date, a special grant of restricted shares pursuant to the Cardinal Stock Plan. (e) All plans, discoveries and improvements, whether patentable or unpatentable, made or devised by the Executive, whether by himself or jointly with others, from the date of the Executive's initial employment by the Company and continuing until the end of the Employment Period and any subsequent period when the Executive is employed by the Company or any of the Affiliated Companies, relating or pertaining in any way to his employment with or the business of the Company or any of the Affiliated Companies, shall be promptly disclosed in writing to the 5 6 Board and are hereby transferred to and shall redound to the benefit of the Company, and shall become and remain its sole and exclusive property. The Executive agrees to execute any assignments to the Company or its nominee, of his entire right, title and interest in and to any such discoveries and improvements and to execute any other instruments and documents requisite or desirable in applying for and obtaining patents or copyrights, at the expense of the Company, with respect thereto in the United States and in all foreign countries. The Executive further agrees, during and after the Employment Period, to cooperate to the extent and in the manner required by the Company, in the prosecution or defense of any patent or copyright claims or any litigation, or other proceeding involving any trade secrets, processes, discoveries or improvements covered by this Agreement, but all necessary expenses thereof shall be paid by the Company. (f) The Executive acknowledges and agrees that the Company's remedy at law for any breach of the Executive's obligations under this Section 7 would be inadequate and agrees and consents that temporary and permanent injunctive relief may be granted in any proceeding which may be brought to enforce any provision of such Section without the necessity of proof of actual damage. With respect to any provision of this Section 7 finally determined by a court of competent jurisdiction to be unenforceable, the Executive and the Company hereby agree that such court shall have jurisdiction to reform this Agreement or any provision hereof so that it is enforceable to the maximum extent permitted by law, and the parties agree to abide by such court's determination. 8. Successors. (a) This Agreement is personal to the Executive, and he may not assign any interest herein in any manner whatsoever. Any purported assignment by the Executive shall be void. (b) In addition to assignments by operation of law, the Company shall have the right to assign this Agreement to any person, firm or corporation, controlling, controlled by or under common control with the Company (including without limitation any of the Affiliated Companies), or acquiring substantially all of its assets, but such assignment shall not release the Company from its obligations under this Agreement. 9. Miscellaneous. (a) The provisions of Sections 5, 6, 7, 8, and 9 of this Agreement shall survive any expiration or termination of this Agreement. (b) This Agreement shall be governed by and construed in accordance with, the laws of the State of Ohio, without reference to principles of conflict of laws. THE PARTIES HERETO HEREBY AGREE THAT ANY DISPUTE CONCERNING FORMATION, MEANING, APPLICABILITY OR INTERPRETATION OF THIS AGREEMENT SHALL BE RESOLVED BY ARBITRATION IN FRANKLIN COUNTY, OHIO, IN ACCORDANCE WITH THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION AND JUDGMENT ON THE AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. 6 7 (c) All notices, requests, consents and other communications required or provided under this Agreement shall be in writing and shall be deemed sufficient if delivered by facsimile, overnight courier, or certified or registered mail, return receipt requested, postage prepaid, and shall be effective upon delivery as follows: If to the Executive: ------------------- Stephen S. Thomas 3750 Torrey View Court San Diego, CA 92121 Facsimile: ___________________ If to the Company: ----------------- Cardinal Health, Inc. 7000 Cardinal Place Dublin, Ohio 43017 Attention: General Counsel Facsimile: (614) 757-6948 Either party may change the address and/or facsimile number to which notices are to be sent to that party by giving written notice of such change of address to the other party in the same manner above provided for giving notice. (d) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective, but only to the extent of such prohibition or unenforceability, without invalidating the other provisions hereof or without affecting the validity or enforceability of such provision in any other jurisdiction. (e) Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (f) As of the Effective Date, this Agreement shall constitute the entire agreement between the parties relative to the subject matter contained herein, superseding, canceling and replacing all prior agreements. No promises, covenants or representations of any character or nature other than those expressly stated herein have been made to induce either party to enter into this Agreement. This Agreement shall not be modified, waived or discharged except in writing duly signed by each of the parties or their authorized assignees. (g) The Executive's or the Company's failure to insist upon strict compliance with 7 8 any provision of, or to assert any right under, this Agreement shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement except to the extent any other party hereto is materially prejudiced by such failure. (h) The term "Affiliated Companies" means all companies controlled by, controlling or under common control with the Company. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the Company has caused this Agreement to be executed in its name on its behalf, in Dublin, Ohio, all as of the day and year first above written. /s/ Stephen S. Thomas --------------------- Stephen S. Thomas CARDINAL HEALTH, INC. By: John C. Kane ----------------- Title: President, COO -------------- 8 EX-27.01 3 EXHIBIT 27.01
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL HEALTH INC.'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS JUN-30-2000 JUL-01-1999 DEC-31-1999 291 0 1,968 (80) 4,041 6,926 2,905 (1,300) 10,280 4,153 1,658 0 0 1,125 2,735 10,280 14,183 14,183 12,807 12,807 807 0 (51) 476 181 295 0 0 0 295 1.05 1.03
EX-27.02 4 EXHIBIT 27.02
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CARDINAL HEALTH INC.'S FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS JUN-30-1999 JUL-01-1998 DEC-31-1998 318 14 1,651 (80) 3,075 5,381 2,736 (1,191) 8,465 3,083 1,535 0 0 1,100 2,196 8,465 12,088 12,088 10,842 10,842 775 0 (49) 380 144 236 0 0 0 236 0.85 0.83
EX-99.01 5 EXHIBIT 99.01 1 EXHIBIT 99.01 The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for "forward-looking statements" (as defined in the Act). The Company's Form 10-K, the Company's Annual Report to Shareholders, any Form 10-Q or any Form 8-K of the Company, the Company's press releases, or any other written or oral statements made by or on behalf of the Company, may include or incorporate by reference forward-looking statements which reflect the Company's current view (as of the date such forward-looking statement is first made) with respect to future events, prospects, projections or financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from those made, implied or projected in such statements. These uncertainties and other factors include, but are not limited to: o uncertainties relating to general economic conditions; o the loss of one or more key customer or supplier relationships, such as pharmaceutical and medical/surgical manufacturers for which alternative supplies may not be available; o challenges associated with integrating our information systems with those of our customers; o potential liabilities associated with warranties of our information systems, and the malfunction or failure of our information systems or those of third parties with whom we do business, such as malfunctions or failures associated with date-related issues and disruption to internet-related operations; o the costs and difficulties related to the integration of recently acquired businesses; o changes to the presentation of financial results and position resulting from adoption of new accounting principles or upon the advice of our independent auditors or the staff of the SEC; o changes in the distribution or outsourcing pattern for pharmaceutical and medical/surgical products and services, including an increase in direct distribution or a decrease in contract packaging by pharmaceutical manufacturers; o changes in government regulations or our failure to comply with those regulations; o the costs and other effects of legal and administrative proceedings; o injury to person or property resulting from our manufacturing, packaging, repackaging, drug delivery system development and manufacturing, information systems, or pharmacy management services; o competitive factors in our healthcare service businesses, including pricing pressures; o unforeseen changes in our existing agency and distribution arrangements; o the continued financial viability and success of our customers, suppliers, and franchisees; o difficulties encountered by our competitors, whether or not we face the same or similar issues; o technological developments and products offered by competitors; o failure to retain or continue to attract senior management or key personnel; o risks associated with international operations, including fluctuations in currency exchange ratios and implementation of the Euro currency; o costs associated with protecting our trade secrets and enforcing our patent, copyright and trademark rights, and successful challenges to the validity of our patents, copyrights or trademarks; o difficulties or delays in the development, production, manufacturing, and marketing of new products and services; o strikes or other labor disruptions; o labor and employee benefit costs; o pharmaceutical and medical/surgical manufacturers' pricing policies and overall drug price inflation; o changes in hospital buying groups or hospital buying practices; and o other factors described in this Form 10-Q or the documents we file with the Securities and Exchange Commission. The words "believe", "expect", "anticipate", "project", and similar expressions identify "forward-looking statements", which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. -----END PRIVACY-ENHANCED MESSAGE-----